Arca Continental SAB de CV
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Arca Continental SAB de CV
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Good day, everyone, and welcome to the Arca Continental conference call. [Operator Instructions] Please note that this call is being recorded. [Operator Instructions]
For opening remarks and introductions, I would now like to turn the conference over to Melanie Carpenter of i-advize Corporate Communications. Ma'am, please go ahead.
Thanks, Katie. Good morning, everyone. Thanks for joining the senior management team of Arca Continental to review the results for the second quarter of 2019. The earnings release went out this morning, and it's available on the website at arcacontal.com in the Investor Relations section. We also have our webcast going live right now, and it'll be available for replay.
It's now my pleasure to introduce our speakers. Joining us from Monterrey is the CEO, Mr. Arturo Gutiérrez; Mr. Emilio Marcos, the Chief Financial Officer; and Mr. José Pepe Borda, the Chief Commercial and Digital Officer; as well as the Investor Relations team. There are going to be some forward-looking statements, so we ask that you just please refer to the disclaimer and the conditions surrounding these statements in the earnings release.
And with that, I'm going to turn the call over to the CEO, Mr. Arturo Gutiérrez, to begin the presentation. So please go ahead, Arturo.
Thanks, Melanie, and good morning, everyone. I want to thank all of you for joining us today to review our second quarter results and some important recent developments.
Let me start by saying that we are pleased with our performance. At the halfway mark of 2019, we are seeing good momentum in our business. We delivered another consecutive quarter of revenue and profit growth despite ongoing macroeconomic uncertainty and relatively weak consumer sentiment facing some of our operations. Total consolidated volume remained flat to reach 580 million unit cases. Net consolidated revenues reached MXN 42 billion, up 4.1% from the same quarter last year. Our top line performance was broad-based with most regional operations delivering positive organic revenue growth, demonstrating our robust execution capabilities and the strength of our brand portfolio.
Total consolidated EBITDA in the second quarter rose 7.3%, reaching MXN 8.1 billion expanding to a margin of 19.3%. Our ability to implement local pricing initiatives, coupled with our tight control of expenses and a proactive hedging strategy allowed us to expand margins across our operations.
I will further expand on the results across our geographies and operations beginning with Mexico. Total volume in the second quarter grew 0.8% on top of a solid 4.3% growth from the same quarter of last year. Growth was driven by still beverages, personal water and jug water, 4.3%, 7.1% and 5%, respectively. Total net sales in Mexico rose 7.9% in the quarter to reach MXN 18 billion making the -- marking the 16th consecutive quarter of net revenue growth. Average price per case in Mexico, not including jug water, rose 8%, reaching MXN 61.09, sustained by our segment revenue management and affordability initiatives. EBITDA in the quarter increased 8.7% to MXN 4.5 billion, representing a margin of 24.9%.
During the second quarter, we launched Coca-Cola Café in Mexico as part of our efforts to drive innovation in the sparkling category, particularly in the low and no calorie segment. Among the highlights of the quarter, Arca Continental participated jointly with the Mexican Coca-Cola system in the opening of the new Jugos del Valle Santa Clara dairy plant in Lagos de Moreno, Jalisco. With an initial investment of MXN 2 billion, the new plant incorporates state-of-the-art equipment and has the potential to become the largest in the Coca-Cola system worldwide.
Moving over to South America, our beverage business posted flat volumes as a result of volume growth in Ecuador and Peru, which was offset by decline in Argentina. Total revenues in the quarter were down 2.9%, reaching MXN 8.7 billion. On the profitability front, EBITDA grew 7% to MXN 1.6 billion, representing a margin of 18.5%, an expansion of 170 basis points. In Ecuador, volume grew 1% in the second quarter, driven by growth in colas, personal water and still beverages, up 4.5%, 10.6% and 15%, respectively. We delivered these positive results despite pressures on domestic demand. We launched a new regular Coke formula with less sugar content this quarter as we drive innovation in the portfolio to offer more low and no calorie options. We also continued investing in market-focused initiatives, bolstering our returnable base in the at-home channel and increasing cooler coverage.
In the second quarter, we installed 11,000 additional cold drink units. Tonicorp, our value-added dairy business in Ecuador, posted single-digit sales decline in the second quarter. We have been able to sustain market share across all 4 categories: yogurt, flavored milk and ice cream, driven by point-of-sale execution and product innovations.
Also in the quarter, Tonicorp announced its best livestock practices award to recognize the best of more than 3,000 branches in quality, productivity, sustainability and innovation. This initiative is part of Tonicorp's effort to further strengthen our value chain and to promote the implementation of sustainable practice.
Moving on to our beverage business in Peru. Total volume in the second quarter grew 3.3% confirming the recovery turn. Growth was driven by sparkling beverages of 5.4% and by the launch of our new flavored water Frugos Fresh, and our sodium -- low-sodium based water, Benedictino. We continued gaining value share in our non-alcoholic ready-to-drink beverages, driven by growth in the low or zero-calorie category with an affordable pricing strategy. Our team has been very successful in mitigating the impact of the excise tax implemented in May of last year. Our flexible price-pack architecture, revenue management discipline and returnable packaging initiatives were fundamental in this turnaround.
Notably, EBITDA reached the highest historical margin for second quarter at 20.3%. Also in the quarter, and a milestone for the entire region and industry, Coca-Cola Peru and Arca Continental Lindley launched the San Luis water bottle made from 100% recycled PET, seeking to reduce environmental impact of the use of plastic.
Looking ahead, the Peruvian economy is to continue to expand as a steady pace: well-accrued inflation, healthy credit growth, job creations to support household spending and improve consumer confidence.
Moving to Argentina. Volume in the second quarter declined 10.6%, cycling a strong 8% growth from the same quarter in 2018. We're starting to see a recovery. Volume in the second quarter confirmed an overall sequential improvement. Our average daily volume report for June showed a positive trend. In the first half of this year, we gained value share in NARTD beverages despite runaway inflation, sky-high interest rates and plunging retail sales. We continued capitalizing in local initiatives such as improved distribution in certain rural areas, which has helped us upgrade execution at the point-of-sale, while increasing product availability and gaining market share.
Shifting gears to our beverage business in the United States. Coca-Cola Southwest Beverages delivered its ninth consecutive quarter of net revenue growth, up 4.8% to $737 million as we continued capturing additional value share. Price/mix was the main driver of sales, up 7.2% and well above consumer inflation. 4.4% of this was through rate increase and the rest was achieved by a change in mix, mainly due to higher price per case of products such as BodyArmor, Monster and Topo Chico. Our mix had both a positive effect in price per case and a negative effect in gross margin per case since the new categories that drive growth and still beverages have lower margin on a percentage basis but a healthy dollar per case contribution. These results were achieved despite a 2.3% decline in volume, which was a result, among other factors, of a change in the distribution of the [ Sunny ] case pack water to Sam's Club. Profitability was not affected, however, as we received compensation for each case sold.
At the profit level, EBITDA in our U.S. beverage business increased 4.6% in the quarter to reach nearly $103 million, representing a margin of 14%. We continue to grow value share net revenue and EBITDA above prior year due to a solid price strategy, coupled with improved expense management and consistent delivery of synergies. We are committed to maintaining a balanced portfolio to fully capture the growth of the new categories and at the same time growing profitably through pricing and immediate consumption packages.
As mentioned last quarter, our team in the U.S. won the Market Street Challenge in 2018 for outstanding execution in North America. As winners of this award, we earned the honor to compete for the Candler Cup, the highest recognition across the global Coca-Cola system for excellence in execution. We are proud to share that our team in the U.S. won the Candler Cup, which means that we were recognized by our peers as the best bottler in the Coca-Cola system worldwide.
Now reporting on the progress of our synergy plan, we are on track to meet our goal to achieve $30 million in savings for this year, which is in line with our target to capture $90 million by 2020. Our Northpoint plant in Houston is scheduled to open on time in 2020. We are laying the foundation to ensure that our new manufacturing distribution and sales facilities become a key enabler of cost savings and efficiencies.
Let me now close our operations review with our food and snack business in the U.S., Mexico and Ecuador. Wise delivered low single-digit revenue growth in the quarter and increased market share driven by growth in the potato chip category as we continue capitalizing on the addition of Deep River and Carolina Country Snacks portfolio brands. Some examples of new Deep River customers include distribution in Delta Airlines, Stop & Shop, Saladworks, [ Crussh ] and Air Force bases across the country. Bokados in Mexico posted sequential mid-single-digit sales growth for the 16th consecutive quarter, driven by growth in the monetary channel.
This quarter, we announced an important geographical expansion into Central and Western Mexico with the opening of 3 distribution centers. We're reinforcing our commitment to profitably grow our Food and Snacks business, which is in line with our strategy to continue gaining scale, while expanding our reach to more customers and consumers. Inalecsa in Ecuador posted a low single-digit sales decline in the second quarter. We continued innovating our product portfolio with the launch of new brand extensions of our tortilla chips portfolio while also capturing share gains in the pastry segment with the launch of new products.
And with that, I will turn the call to Emilio. Please, Emilio?
Thank you, Arturo, and welcome again, everyone. We appreciate your participation in our earnings call. We continued to capitalize on the foundations we set at the beginning of the year. Our pricing strategy and operating expenses controls, combined with an improvement in volume trend. These steps, accompanied by relatively stable commodity prices, paved the way to a very positive second quarter. EBITDA growth outpaced revenue growth, which resulted in the second consecutive quarter of margin expansion.
Our consolidated revenues grew 4% in the second quarter and 3.2% for the first half of the year, primarily driven by our Mexico and U.S. operations, growing 8% and 4%, respectively, which was partially offset by South America operations being down 3% mainly from Argentinean peso depreciation.
Revenues in the first half of the year in Mexico and U.S. were up 7.4% and 4%, respectively, thanks largely to the carryover effect from last year's price strategy while revenues in South America decreased 4.8%.
Cost of goods sold was up 4.8% in the quarter and 4.3% year-to-date. These increases came mostly from the sales mix change between distributed versus produced products in the U.S. and higher concentrate prices in Mexico. These factors contributed to a reduction of 40 basis points when compared to the second quarter of 2018, a solid improvement from the 80 basis points gross margin contraction we reported in the first quarter.
SG&A expenses increased only 1.9% in the quarter and 1.3% in the first half, representing an important contribution to our EBITDA margin expansion. This increase is a direct result of tighter expense controls and the execution of the planned efficiencies announced in the first quarter.
Consolidated EBITDA in the second quarter increased 7.3% to MXN 8.1 billion with a 19.3% margin. Year-to-date, EBITDA rose to MXN 14.4 billion with an 18.2% margin. Excluding the benefit from the adoption of the IFRS 16 accounting standards in the quarter, EBITDA grew 5.7% and had a margin improvement of 30 basis points, similar to the first quarter. The income tax accrual for the quarter was MXN 1.3 billion, a decrease of 1.8%, while the effective tax rate was 26.9%.
For the first half of the year, the accrual reached MXN 2.2 billion, an increase of 6.5%. The comprehensive cost of financing during the quarter was up 8.2%, mainly due to exchange rate losses of MXN 40 million versus last year's MXN 99 million gain, partially offset by MXN 32 million benefit from monetary position from the Argentinean operation. The combination of lower income taxes and 4.8% operating income growth was partially offset by a higher comprehensive financing cost, resulting in net income increase of 5.2% for the quarter, reaching MXN 2.8 billion and representing a margin of 6.7%.
For the first half of 2019, net income increased 12.8% to MXN 4.5 billion, reflecting a margin of 5.7%. As of June 30, 2019, we had a cash balance of MXN 16 billion and debt of MXN 54.6 billion. Our net debt-to-EBITDA coverage ratio is 1.36x.
Consistent with our strategic priorities, our strong balance sheet supports our business goals and maximizes our financial performance. Operating cash flow generation in the first 6 months of the year was MXN 11.5 billion, 35.4% higher than last year. This was mainly allocated towards CapEx of MXN 4.9 billion and MXN 4.1 billion for dividends.
For the second half of the year, with the expectation of raw material rates remaining relatively stable, we will continue to capitalize on the results of our pricing strategy and disciplined operating expenses controls while ensuring that our fundamental market execution best serves our consumers.
And with that, I'll turn it back to Arturo.
Thank you, Emilio. Looking at the remainder of the year. While there is still some level of financial volatility from macroeconomic risk and escalating trade conflicts, our industry remains vibrant and growing. We have lived through downturns before and understand how to manage the business in these circumstances. Speed and agility are critical to address this rapidly changing consumer landscape. Despite the challenges, we're executing on all fronts to sustain growth momentum. So while we expect consumer dynamics to remain difficult throughout 2019, we are encouraged by our performance across our markets. In summary, Arca Continental will remain relentless in our efforts to become more efficient and to adapt to changing market conditions. We're building on strong execution and a solid innovation pipeline. I'm confident we will achieve our full year guidance. Thank you for your continued support.
Operator, we're ready to open the floor for questions.
[Operator Instructions] Our first question will come from Isabella Simonato with Bank of America.
I have 2 questions. First of all, in the U.S., we saw water volume is down double digits in the quarter, which in our view was a little bit of a surprise since you launched new Smartwater, right? Can you elaborate a little bit more on what caused such decline? And also in the U.S., you mentioned that costs were affected by the sales mix between the distributed versus the produced products by you. Can you give us a little bit more details on the margin differential? And this is something that we can assume will continue to be -- to happen in the coming quarters? Or this mix could change throughout time?
Thank you, Isabella. Well, with respect to your first question and the performance of water in the U.S., the reason for that is, and we are doing well with the launches in Smartwater and the extensions of the brand, but the reason for the decline is that as a system, the Coca-Cola bottling system in the U.S. moved delivery of the [ Sunny ] case pack to Sam's Club, one of our main customers, from a red truck to a third-party. So this is really an EBITDA neutral decision for us. We still receive a compensation per case delivered, but it's just a better, I would say, logistic solution for the system as a whole. And just that effect would represent about 2/3 of total volume decline in our second quarter for the whole business. So if you disregard that, without that impact, volume in the quarter would be still lower than prior year but about 0.8%, so that would be the main explanation for the variation of water. I'm going to turn it over to Emilio to address your second question, if that is okay?
Sure. Thank you, Arturo. Well, as I mentioned, still good results, a lower gross margin in percentage compared to [ CODs ] but it's important to highlight that it's -- they have a higher dollar contribution per case. Also -- so these categories have a better rate given that we don't need to make any additional investment in production -- productive assets -- or COGS or production lines and these categories give us more scale and distribution. So we just put it on the truck, and it gives us additional EBITDA.
So what we will be seeing in these categories are growing, as an example, we have BodyArmor. We didn't have it last year. We have at this year, so that's a new volume with, again, better dollar contribution per case but lower EBITDA margins. So that will impact our EBITDA margin but have a positive rate margin because, as I said, we don't need to invest. And these categories doesn't mix or has a cross interaction with [ CODs ] so it's additional volume, additional EBITDA. So that's a complementary category that we have been growing. Not only BodyArmor, also Topo Chico is in that category, Monster, as some examples.
So when we look at our business, Isabella, the end of the day, we have to look at margins with that perspective as well not only the percentage, but the actual dollar contribution per case, and some of these categories are in that space and also taking into account investment, as Emilio mentioned.
Our next question comes from Antonio Gonzalez with Credit Suisse.
If I may, I just wanted to have a super quick follow-up on the previous question on the U.S. Is it possible to share with us, excluding IFRS 16, how much would margins, specifically in the U.S., would have come down? And do you think this is related to margins presumably declining in the U.S.? Is it related to the high comparison basis and the effect that you just described on mix moving towards products like BodyArmor? Or were there any additional headwinds in raw materials or else that impacted quarter-on-quarter, right, because last quarter you were already delivering margin expansion even without IFRS 16.
And so that, as a very quick follow-up, and if I may, my question, Arturo, I wanted to ask if you can give us a little bit of longer-term perspective on your PET recycling initiatives, right? I guess it's fair to say that you guys are among the leaders across the Americas, really, but there is a long way to go, I guess, to get to the targets established by the Coca-Cola company for the next decades, right? So I wanted to ask you if you guys think you could step it up even more, increase perhaps the CapEx in your recycling facilities. You obviously have a very successful benchmark case of PetStar, could you replicate that elsewhere? Just I guess your big picture thoughts on that theme, Arturo?
Yes, Antonio. With respect to your first question, I will let Emilio elaborate. I just wanted to mention that we do have some headwinds in the U.S. We have several effects that come into play. One is certainly the margins as a percentage basis erode because of what we just explained. The growth on these very profitable categories, but that from a margin perspective, do not help if you look at just percentages. And then we have headwinds in the first half of the year, still with some COGS increases, basically PET and aluminum, where the comparison is still not favorable but the trend is very favorable. And I think those somehow offset the positives of many of the synergy projects and some of the carryover effect of synergy projects of 2018. So I'll let Emilio provide more detail on the numbers.
Yes. Thank you, Antonio, for your question. Well, talking about the beverage business in U.S., only the beverage business. EBITDA margin was 14% in the second quarter, which is a very good margin. So we also had that margin second quarter last year. And it remained flat compared to last year. Even with IFRS, it's basically -- it's a little bit lower than that but not that much. And year-to-date, we have a good margin expansion of 50 basis points for this Coca-Cola established beverage business.
This is a result of, as we mentioned, different reasons. One is the pricing strategy, the synergy plan and also partially offset by some raw material prices since we still have some higher PET and aluminum prices in the first half of the year. We will have a similar prices in the second half of the year versus last year but the first half, we still have higher prices than the first half of last year.
And also as I mentioned, the evolving portfolio mix, the energies and stills, which, as I mentioned, has higher dollar contribution on per case basis but lower margins. So these categories are continuing to increase our EBITDA, EBITDA margin, and it's also helping improving our ROIC again since we do not need to invest any additional assets.
So it's important to mention also that EBITDA in the first half of the year in Coca-Cola Southwest increased 7.6% even though volumes were lower or negative than compared to last year. So with less volume, we're increasing our EBITDA on 7.6%. And for the second half, we continue to target, to expand our margin and capture the MXN 30 million synergies for the year. And we're on track on that, we basically have 50% of those synergies already, so we're already positive on the second half of the year.
And even though we have made a lot of progress in our new plan, we haven't yet seen the effects of the efficiency of the new facility. So Antonio, I'm going to move over to your second question about our PET long-term strategy. And first, I would say that PET recycling is a very important topic. It is now, for everyone, it's been important for us for a long time and even before The Coca-Cola Company issued this pledge of World Without Waste, we, in Arca Continental, have been working, in having one of the most responsible management systems of PET packaging in our industry, and we are fully committed to this initiative to collect and recycle the equivalent of all the bottles and cans that we sell. And that is the commitment.
We've made certainly more progress in Mexico starting with, as we mentioned, PetStar. It's the largest food grade recycling facility in the world. It is producing 51,000 tons of recycled PET that we incorporate into the packages of the Mexican Coca-Cola system, trying to beat other bottlers.
The commitment in PetStar is that we have to continue to grow. If you look at how much of PCR, per cycle resin, we incorporate into our packaging, it's -- I would say, at a good level at this point, but it's not where we want it to be. In Mexico, it's about 30%, if you consider the whole of our operations we're above 20 -- maybe 24% or so. So what we needed to do is to continue to invest. In the case of Mexico, in PetStar, to expand capacity jointly with The Coca-Cola Company and the rest of the bottlers to get us to the target, which would be to incorporate 50% of recycled resin on our bottles, and obviously to collect a higher percentage of what we collect now, which is very high. And if you compare that with other markets, we're really at a good level of recovery, but we want to get that to 100% and that is part of the pledge of World Without Waste.
Similarly, we are working in South America, mostly with other -- with suppliers of PET, to jointly develop projects where we can incorporate more recycled resin to our products. And in the U.S., probably the U.S. is the biggest challenge, but we are also working to address this opportunity, maybe being a neighboring territory to ours in Mexico presents us with the opportunity even to use some of the Mexican recycled resin in our packages, we are exploring that possibility also.
But the immediate project would be the expansion of PetStar. Certainly, that requires investment, but I think it is an opportunity to become more efficient as well because we want to have the best of both worlds, Antonio. We want to have recycled resin but at parity cost versus virgin, that would be the vision. And at this point in time, if you look at the history of PetStar, we've been fairly successful at achieving that. And so it's about creating a circular economy but also doing that at a very efficient cost for us. So that's why scale in PetStar would be very important, not only to incorporate more resin but also to do it more efficiently from a cost perspective.
Our next question comes from Alex Robarts from Citigroup.
The main issue I wanted to explore was the top line trend in Mexico. But just one clarification first, you gave us a confirmation of U.S. synergies at $30 million this year, and I'm just wondering, is that a little bit higher than what you had thought earlier in the year? I think if I remember, numbers around the mid-20s is kind of the goal. But I just wanted to know if that's in fact what has changed or not? And kind of related to that, do you feel -- and you've given us the buckets for the synergies, but do you feel this might be that this number of $30 million is front-loaded in the year, backloaded or kind of even throughout the year? Any color on that would be great.
But kind of the main question is again on the top line trend, when we think about that 8% sales that you put up for the Mexican business in the quarter, I mean, it's probably going to be one of the fastest growth rates that we've seen in Mexican consumer space, and it's not really the volume story, it's the price/mix initiatives that you're doing. Could you tell us and kind of comment a little bit on how you see the back half of the year vis-à-vis price and mix? Should we think a little bit about any upside risks to the volumes, which frankly, have been pretty lackluster in the first half? So any thoughts around the kind of short-term top line view in Mexico would be great?
Yes. Thank you, Alex. Well, talking about Mexico first, yes, we did have a volume decline in the first half of the year. Our revenue grew a healthy level. I think we had a very solid pricing strategy. We've identified some of the reasons for the decline, it's mostly regional. I would let Pepe elaborate a little more on that, but I will tell you that for the second half, we are confident that we will continue to grow the business. We have many relevant activities, especially things that we're doing in the market and introduction of new products and a number of activities. And it's already looking better just at the start of the year -- of the third quarter.
Also we continue to see an effective pricing strategy for the second half of the year. So we expect our forecast for the year would be aligned to our goal, to be above inflation. Certainly, not going to be the at the level of more than 8% as we've had year-to-date because it's about how the prices compare with increases of last year. So they're not, let's say, parallel lines but certainly we're going to be above inflation for the year.
I will let Pepe elaborate more on the consumer environment in Mexico but just let me talk a little bit more about what you asked on the U.S. synergies. The number that we've estimated for this year, it's pretty much in line with our original plan. We've spoken about 90 million and they're -- I would say evenly spread across the 3 periods: the 2017, '18, then this year, and then the coming year where we're going to have mostly the effect of the new facility and some of the shared services initiatives that we have implemented.
In the first half of 2019, I would say that it's less than 50% of the overall impact. And I have to mention also that when we talk about the effect of synergies, we are very strict about how we track those. We're talking mostly about savings and some of the revenue synergies that we can clearly identify and isolate from the rest of the business, we're not including here the effect of the better execution in the marketplace, our new go-to-market models, the most transformational things that we're doing in the U.S. market are very hard to calculate, so we don't want to get confused about what the impact of those, but we are confident that, that's going to be very significant next year and in the next coming years.
So if you think about the 3 transformational things that we're doing, aside from the specific savings projects, are the fundamentals as the backbone of our execution strategy in the U.S., which is really improving, and we're improving visit completions, order [ strike rates ], the action items that we sent over to our sales force to give targeted direction to our frontline, our new go-to-market models for the on-premise market, what we call the customer intimacy project that we are already starting to roll out and revenue management where we have already seen the effects of that and probably that's easier to connect with our financial performance. But all in all, they are spread across the 3 periods that we're tracking. So I think we're pretty much aligned with the plan there.
And with that, I'll turn it over to Pepe to make some additional comments on the consumer environment in Mexico if that's okay with you, Alex.
Thanks, Arturo, and thank you, Alex for the question. As Arturo was saying, most of the volume decline year-to-date has come from a specific region in Mexico, the region that is in the North Pacific. 70% of the volume decline comes from there. And the main reason is actually weather. And we can see that when we compare to other bottlers in the same region.
So as also, when we talk about price, as Arturo said, prices will not continue in the 8% range because we are citing higher rates from the next year, but we will finish in a healthy price increase over inflation and however, the volumes have been -- we have seen sequential recoveries in the second quarter against the first quarter, and we have an easier comparative base in quarter 3 and quarter 4.
So we will see a change from revenue increase mainly coming from price to a more balanced increase coming from both volume and price. We have not seen yet the positive effects from the social programs and initiatives from the government, but we understand that these new governments have a hard time organizing the delivery on those social programs, and we expect to see the positive effects of these programs in the rest of the year.
Our next question comes from Alan Alanis with UBS.
Congratulations on the quarter. Couple of quick questions, one of them is regarding the dairy market. I mean you're still delivering a very, very strong volume growth of 21%. So the question was how do you see that growth going forward? I mean I noticed that you still have less than half of the intended coverage, so that would indicate that the solid growth in the dairy category, including the new plant that you mentioned in Lagos de Moreno should continue. So could you just remind us what is the market share that you have? And what is the outlook for the dairy category in Mexico? That will be the first question.
And the second question has more to do with capital deployment. I mean you are on the 1.4x net debt-to-EBITDA. So it will be interesting to see how do you think about between increasing the cash back to shareholders either via buybacks or dividends or how would you be thinking about future M&A given the strong balance sheet that you have?
Let me address the second part first, and then turn it over to Emilio and Pepe if they want to complement on my comments. To your second part, well, certainly, it connects to what you said about our M&A strategy. We always try to maintain a very solid balance sheet and leverage target that's basically below 2x net debt-to-EBITDA. So we manage that continuously and at the same time that we try to identify opportunities for growth through acquisitions or some sort of alliance that might require to use our balance sheet. And with respect to that at this point, our priority has been to focus on consolidating our new businesses and capitalize opportunities for value creation and synergies in our operation, and we still have a long way to go there.
But as you know, part of the strategy is to continue to grow on the food and snack divisions, so we're actively looking for opportunities there. And also our scale in beverages necessarily presents opportunities, and we expect that to happen in the future. So we have to be ready if there is a good opportunity to create value. In line with our track record of always focusing on value-accretive transactions, and you know we've been very prudent in that regard.
So the key for us at this point, if you talk about M&A, is to continue to strengthen our capabilities in core processes because when we don't talk much about that in these calls, but we track a lot of the progress in our internal processes in our ACT model and the innovation of processes, things that are going to be very useful in creating value when we find opportunities for acquisition in our core business or the adjacent food and snack businesses. So that means that we're going to continue to be consistent with our store policy.
And with respect to dairy. For the dairy, it's a great opportunity if you think about, again, the muscle of the Mexican system, and there is an opportunity to reach more customers in a category that already exists. We've been successful in developing new categories with consumers, but this, for me, is clearly an opportunity to participate in the category that is obviously already part of the consumer space now.
Within dairy, the segment that we have been focusing most on was flavored milk and basically because it's very profitable. And as we increase our coverage of the direct-to-home channel, we've been also finding opportunities to grow in flavored milk, not only in volume because if you look at percentage of growth in volume, it is probably not the best metric because you come from a very low baseline but mostly about market share. And we've made a lot of progress in some regions. I will let Pepe elaborate a little more about where we stand as a player in the dairy industry.
Yes. Thank you, Arturo. As Arturo was saying, our focus in the dairy category is not in the -- in white milk or in what makes the most of the bulk of the volume in that category, so we are focusing on flavored milk, on value-added dairy in which -- which are the more profitable categories. We have increased our market share in flavored milk, almost 2 percentage points in the last year, and we've grown the Santa Clara volume. We're growing steadily between 25% and 30% month after month. We've now covered almost 45% of all the traditional trade in Mexico. And as Arturo said, we're making important inroads in the direct-to-home channel. So our strategy there is to play in the most profitable categories and not go after value share in the bigger volume but less profitable segments.
Got it. And what's the market share again that you have right now? Is this 200 basis points market share out of what base?
I don't have the number right now. I'll send it to you, okay? But it's between -- it's around 5% -- 4% to 5%.
All right. Got it. It's still around in the low to mid-single-digit markets?
Yes.
Fair enough. So there's a lot of upside. Now that's very useful. Quick -- really, really quick follow-up. Just because you mentioned the M&A on the food and beverage -- on the food space and the snack space, Arturo? Could you remind me -- remind us, what do snacks and food share with the beverage platform? I mean there's no shared distribution, there's no shared sales, it's totally independent sales, totally independent distribution. Is that the case across all of your territories, correct? They're totally independent units in snacks and beverages?
Well, it's not a, I would say, unified model. We do have independent operations in the U.S., mostly because we are operating in different regions. Our brands in the U.S. are stronger in the Northeast, in New York Metro and in New England, and mostly, the East Coast. So there's not a lot of opportunity to synergize with our Texas operation.
In the case of Latin America, in Ecuador, for example, we're much more integrated. We approach the modern channel jointly, and we do some other cross-selling activities and promotions across categories. We even have some synergies in our distribution and operation as well. And I would say, among all 3 companies in Ecuador, it's a very unique system where we have dairy, we have snacks, we have pastries, we have obviously our beverages, and also we have a distribution network in Ecuador that distributes third-party products. So it's a completely different model, and we are rolling out an evolution of the original go-to-market models in Ecuador, trying to synergize more the 3 businesses.
And in Mexico, I would think it's an intermediate model where we do have some joint activities, especially in the market and taking advantage of some of the market intelligence that we have with the beverages, but we keep the businesses mostly separate in our operations. So I would say that there's not a single way to do it. It depends on the market. It depends on how relevant we are. It depends on how important the brands are in a particular market.
Our next question comes from Lucas Ferreira with JPMorgan.
My first -- kind of 2 questions about the U.S. The first one is simply to understand just actually to follow up from previous questions, but it seems like you were not planning to do more price increases for the second half. Just wanted to confirm that. Or do you see like the economy would allow you to do similar adjustments to prices, if that's in the plans or not? And my second question is related to this discussion, which is an interesting one about the EBITDA per million unit cases against [ when looking ] at margins. I think I may agree with you that the market is too focused on the margins.
So for us that are modeling and looking at the company 2 years now in a row, that are trying to understand your plan for the U.S., what should be the right metrics for us to look? Where -- let's say, how much return invested capital contribution do you say, let's say, plan for the next 2 years should have? Or how much growth in terms of EBITDA per million unit cases we should look as opposed to be just looking at the margins, so just at least on, let's say, quality standpoint, if you can help us understand how your business in the U.S. must be looking like in 2 years?
Yes. Thank you for your questions. Let me talk first about pricing in the U.S. And yes, we've had I think a very, very effective revenue management in the last few months, and this is something that we do work jointly with the Coca-Cola system in the U.S., and we've been able to deliver on our commitment to increase prices above inflation. During the second quarter, our price grew 7.2% versus previous year, and that's well above consumer inflation. We have to say that only a part of that is through rate increase, which means a nominal increase of prices, and that was like 4.2%.
The rest of the result in the change of mix as we -- as I mentioned, we are not selling [ Sunny ] case pack to Sam's, and we are improving our performance in Topo Chico and Monster, and now we're selling BodyArmor as a brand in our portfolio. So all of that contributes to a positive effect in price per case.
For the second half of the year, we're going to continue to do that not only to find the right price increases to maintain our pricing above inflation and the mix is going to continue to help. Also, to make sure that we are very rigorous in managing our own promotions, which also contribute to net price. So by the end of the year, we expect to be significantly above expected U.S. inflation as we promised. It's not going to be the same differential that you've seen in the first half, but we're going to have price increase of probably around 5% for the whole year. And I think that is a very positive result.
And it certainly connects to the second part of your question, how we have to look at the business in more detail from a different lens because now we have these categories that are growing that provide revenues that may be they can erode the margin, but they contribute to EBITDA.
So I think for me, the easiest metric and the one that we track for, let's say, for execution on the market, it's how many dollars per case they're bringing and what is the investment that is required to produce those products. As Emilio mentioned, the advantage is some of these products bring a good dollar per case contribution and not necessarily acquiring investment in manufacturing and I said so.
If you look at our -- the whole universe of our products, we have BodyArmor, Monster, juices that are above average in the contribution in a dollar per case basis. So at the end of the day, as Emilio mentioned, we have to take into account that we are growing our EBITDA in absolute terms, and that I think is very satisfactory for the first half of the year where EBITDA grew and with a healthy margin if you compare that to where the U.S. system operates.
Got it. If I may, just also a quick follow-up. You guys talked about weather issues in Mexico. We also saw some issues in the U.S. in the first quarter. We also saw a pretty rainy month of May, if I'm not mistaken, in the U.S. and a lot of floodings in the Midwest but also in Texas. So do you guys had any impact from weather in this quarter in the U.S. or...
Yes. I would say that volume decline in the U.S. is caused mainly by, I would say, 3 main factors: One is the [ Sunny ] case pack sent from our red truck to third-party delivery; the decline, in particular, convenience retail caused by cycling very aggressive promotional activities. So we're also trying to get rid of those sort of aggressive promotions that do not contribute to the profitability of the business. And the third factor was unfavorable weather, especially lower temperatures. We normally don't want to talk about that because they, obviously, in that at the end of the year, they even out, but it was a factor for the first half of the year, there's no doubt about that.
Our next question comes from Miguel Tortolero with GBM.
The first one is regarding Ecuador. I just would like to get a bit more color on the dynamics you're seeing there. What's behind the strong margin improvements on the region considering that volumes were not especially that strong during the quarter? And then secondly, regarding Argentina, it seems that you should start to see easier comps in the second half of 2019, specifically in top line, so could you just elaborate a bit more on the sequential recovery you mentioned on the initial remarks?
Yes, Miguel, and thank you. Well, first, talking about Ecuador. Yes, the volume started to grow in the second quarter, although we were cycling a good growth in last year. But most importantly, I think we have been better at pricing in Ecuador. It was not necessarily the case last year. I think we've been able to find the right price pack architecture, the right curve between returnable and nonreturnable, zero calorie, our regular Coke. So we -- I think we've been able to align that much better and that is reflected in the profitability of the business.
So we were focusing a lot on profitability, on rigorous OpEx control, on a balanced architecture of pricing. It's not only about increasing prices. It's about how every single relevant package is placed in the price pack curve to make sure that your consumption is not shifted to less profitable products. So I think we've been able to do that much more effectively this year, and that's why we've been able to grow average price. Even though we have increased returnability in Ecuador, which also is a significant change in the structure of our portfolio for this year. We've increased the mix of returnable products, which provides affordability, but at the same time, it's profitable. It may not help in price at the end of the day, but what's important is that it's very profitable, and that's why EBITDA was significantly better and margin also has been improving. So -- and I recognize the effort of the team in Ecuador because the macroeconomic conditions are still very difficult in that country. So it's hard to grow the business, but I think we've been able to grow. The perspective is very positive. We are going to have a fantastic month of July, and we are going to do it in a very profitable way. So we're excited about the future for Ecuador and also because we're doing things better in the market. Again, we are reaching more customers, we're serving better the smaller customer segment, which is very hard to do in Ecuador because the market is so fragmented.
And talking about Argentina, well as you say, we are seeing that the worst could be over now. The economic activity is still contracting but at a lower pace, and there's been a singularization on the currency and signs that the inflation also is going to be better according to the forecast.
For volume, it continues to decline, obviously, in the second quarter, but the month of June we grew volume. We're the only franchise in Argentina that grew volume in Ecuador, and we did that increasing price pretty much in line with inflation. So we have increased prices around 50% year-over-year, and we were able to achieve growth in the month of June.
So we have a special plan, focused on developing territories that are operated through third parties. I think we've failed to be very good at execution in those customers; customers that are not in large urban areas. So just to give you a number, those customers were growing volume at 7% year-to-date even under these conditions. So we found opportunities that we're capturing, and the environment is going to be much better in the second half of the year. So again, the trend, both in Ecuador, in Argentina, is improving and Peru continues to be a very good market. So we are confident about that.
Our next question comes from Juan Guzman with Scotiabank.
Congratulations on the quarter results. And I have a couple of questions here. The first one, it's a follow-up regarding growth in Argentina. You mentioned that you have surveyed a low single-digit growth in June. And could this be attributable to promotional activity related to the Copa América? Or are you starting to observe change in the trends now? And we will appreciate if you could give us some more color in this region. And the same line, what is the performance that you are expecting in this country for the half of the year?
And now that a year has passed since the change of the excise tax in this country, how has your non-sugar and low-calorie portfolio has evolved during this period? I mean in terms of volume contribution of this category, what's the picture now and how was it before the tax implementation?
Thank you, Juan. Well, first, talking about Argentina. Yes, we had a good month of June and certainly, as you say, the Copa América may have an effect, although last year we had the World Cup. The Copa América was not held in Argentina anyway, and the Argentinian team did not do that well. So I think that it can have an effect, but it will not be that significant.
But all in all, what we see is a slightly better consumer environment. It's not a dramatic shift into growth in spending, but it's -- I think it's a much better trend I would say all in all. And we were able to do that again, and I want to stress that with a good pricing. So I think that the data that we have seen could suggest a turning point in the economic situation for Argentina. And so we expect to have a good second half, aside from the efforts that I mentioned, that we are going to be doing our own not only in channels but with single-serve packages. We've had introduced the smaller packages that you know it's very hard in Argentina to grow the mix of single-serve, but we've done that with Sprite, Fanta, Crush, Kin water, Aquarius at 250, 375. And so we are doing a number of things that are going to contribute to restore growth in that market.
With respect to Peru, yes, we are doing much better. We are starting to recycle the taxes that was supposed last year. I have to say, we have a better execution at the point-of-sale, and we are leveraging that right now and more returnability in the market. And I will let Pepe comment further on the performance of our no-calorie categories and the situation in that market.
Yes. Thanks, Arturo. Thank you, Juan, for the questions. Regarding the increase of low and no-calorie beverages. We have grown around 25% versus previous year, taking advantage of the lower excise tax, and that's improving profitability. Our mix of low and no-calorie products have grown 13%. It goes up to 36% of -- 37% of our total business. That has been sustained not only through reformulations but also through better execution, for example. And now that we are using a universal bottle for refillable packages, we can offer our noncalorie products in refillable bottles, and that's increasing affordability and coverage of those.
At this time, this ends today's Q&A. I would now like to turn the call back over to Arturo Gutiérrez for closing remarks.
Thank you, and before concluding our call, I want to remind you that Emilio, Pepe, and I look forward to seeing you at our upcoming Company Day in New York City on Friday, August 23. And please reach out to our Investor Relations team if you need assistance to register for the event or for any follow-up questions. Thank you for your interest in Arca Continental, and have a great day.
Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.